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I received some good reader reaction to my column last week, “Gold, Guns and Spam.” I think some of you were surprised that I could write about something other than natural resources, and others were surprised to find there are stocks and ETFs that can buck the trend and go up when most others are going down. Well, I have three more for you. This time, we’ll cover entertainment, drugs and consolidated mining.
Why would you buy them? Well, recent action shows that sellers may be exhausted. While I think that rallies in the major indices should be sold, there are always stocks that go up in bear markets, just as there are stocks that go down in bull markets. And if yesterday’s rally leads to more upside, that would add more juice to these three stocks.
Here are my 3 new picks …
Hot Flicks Make for a Hot Stock
Netflix (NFLX). My parents are still stunned that I get movies through the mail from Netflix, so I think the online movie rental company hasn’t reached saturation yet. It is doing bang-up business, and if history is any guide, should continue to do so. During the Great Depression, movies were one of the few growth industries, as a weary world turned to escapist entertainment.
Netflix had an excellent recent quarter. Revenues jumped 19 percent and earnings rose 58 percent. EBITA (Earnings before Interest, Taxes and Amortization), a widely used measure of a company’s efficiency and profitability, hit a six-year high, and was up 18 percent over the year earlier.
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| In hard economic times, a weary world turns to escapist entertainment — which helps explain Netflix’s rise in revenue and subscribers. |
The bottom line is that the company’s bottom line is getting healthier all the time.
Netflix has increased its customer base to approximately 10 million subscribers, a third more than it had at the end of 2007. Looking down the road, Netflix is expected to control 32 percent of the video rental market by next year. The company has forecasted that its subscriber base will top 11.3 million by the end of 2009.
Brave New World of Video
Netflix has exceptional growth prospects as it ventures into streaming movies and games over the Internet. It now provides content to subscribers over the Web and is increasing its distribution through other delivery partners. In a press release with Microsoft, Netflix announced that in the three months through December, it has streamed 1.5 billion minutes worth of video to the Xbox 360 console and approximately 1 million Xbox Live Gold Members. This is BIG considering the time period and the limited subscriber base.
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Through strategic partnerships, Netflix’s streaming video can be delivered to subscribers through Blu-ray players, broadband-enabled TVs and Roku set-top boxes. These recent initiatives show the potential size of the streaming market, as Microsoft has sold more Xbox 360 consoles than all these delivery systems combined.
Since the technology is available and the profit margins are higher, the company is looking at the possibility of terminating postal delivery and delivering videos only over the Internet.
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Netflix is poised to take advantage of the expanding broadband market and delivery of new streaming services over the Internet. The company’s ability to provide these services is head and shoulders above both Blockbuster and Amazon.com. Like it was with mail order rentals, Netflix is on the forefront of the video-streaming business.
Now, let’s look at the chart.
This chart looks great. It IS coming up to important overhead resistance. If it fails here, it could easily go down to 32 or even 22. But if it breaks out, my upside target would be 62.50 — a 60 percent move higher from recent prices.
An Rx for Success
Teva Pharmaceutical (TEVA). This generic drug maker formulates generic versions of just about everything. It has strategic alliances with Impax Laboratories Lundbeck, Jexys Pharmaceuticals and Barr Pharmaceuticals. It should be a winner as the Obama administration reworks the nation’s health-care system and tries to cut costs.
Teva has plenty of good news coming out of its drug pipeline …
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| Teva Pharmaceutical makes generic versions of just about everything. |
- It has obtained U.S. FDA approval to market generic Imitrex, a migraine treatment made by GlaxoSmithKline. Branded Imitrex had $1 billion in sales in 2008. Teva has six-month market exclusivity, and it will begin deliveries immediately.
- Last month, European regulators approved Teva’s multiple sclerosis drug Copaxone as a preventative treatment. The ruling allows Teva to market the injectable drug in 24 European Union countries. U.S. approval for Copaxone is pending.
- Teva also received final approval to market its generic version of Janssen’s antipsychotic agent Risperdal. The brand-name version did $78 million in sales in the 1-year period through last September.
Not all the news is rosy. Teva reported a fourth-quarter loss of $688 million, or 88 cents a share, compared with year-earlier net income of $570 million, or 69 cents a share. But this is due to items including the acquisition of in-process research and development of $992 million in connection with the acquisition of Barr Pharmaceuticals in December. Excluding those special items, Teva’s earnings were $634 million, or 76 cents a share.
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Raising Its Dividend
However, that bad news isn’t so bad considering that, at the same time, Teva raised its quarterly dividend by 33 percent to nearly 15 cents per share. I think that shows the pain is short-term for Teva.
Sales in the quarter rose to $2.85 billion from $2.58 billion a year earlier.
Now, let’s look at the chart.
Teva is near support at 41.50. I think short-term weakness could offer a good entry point, as Teva’s stock has pulled back to support. It should rally to overhead resistance at 50, a 20 percent move higher.
Digging Out of a Hole
Freeport McMoRan Copper and Gold (FCX). We can’t talk about FCX without talking about copper and gold, especially copper, because Freeport McMoRan is one of the world’s biggest copper miners. So here’s the scoop on copper …
Copper prices have tumbled 61 percent in the past year. Now, copper prices seem to be putting in a bottom, if not “the” bottom. At the same time, copper short positions are declining. As of March 3, there was a net short position on the NYMEX of 24,900 copper contracts (about 612 million pounds of copper). That is down nearly 10 percent from the end of February, when there was a net short position of 27,300 contracts.
A decline in short positions usually is an indicator of a coming rally. And it can be a very strong rally if speculators rush all at once to cover their shorts.
Freeport McMoRan is big in copper — and gold. The company has total consolidated recoverable proven and probable reserves of approximately 93.2 billion pounds of copper; 41 million ounces of gold; 2 billion pounds of molybdenum; 230.9 million ounces of silver; and 600 million pounds of cobalt. The company’s Grasberg mine in Indonesia is the world’s single largest reserve of gold.
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First, the Bad News
To be sure, the decline in copper prices last year hit FCX in the wallet. It reported a net loss of $13.9 billion for the fourth quarter of 2008, a whopping -$36.78 in earnings per share (EPS). But the company’s net income — after special items totaling $14 billion — is actually $23 million, or a positive EPS of $0.06. Analysts had been expecting an EPS loss of $1.16. So, the miner beat expectations.
The company expects copper sales in 2009 to be off 2008 levels by 9 percent, molybdenum sales are projected to be off 25 percent, and it expects gold sales to be flat. Operating cash flows in 2009 are expected to be lower by more than two-thirds, from $3.4 billion in 2008 to $1 billion in 2009.
Now the Not-So-Bad News
With all this bad news and implosion of the copper market, you might think that Freeport shares would be slumping lower. But it seems the market anticipated the fall and drove the stock down in advance. FCX is actually up 32 percent year-to-date through Monday.
And there is good news. China’s infrastructure build-out should ramp up global demand for copper (indeed, that may be what is whittling down stockpiles right now). And then there’s Freeport’s new mine.
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| As one of the world’s largest copper miners, Freeport McMoRan should benefit from increased global demand for the metal. |
Freeport owns about 58 percent of a copper and cobalt mine in the Democratic Republic of Congo. This mine should start producing in the second half of this year. Freeport expects production to reach 250 million pounds of copper and 18 million pounds of cobalt annually in the initial years.
In 2008, Freeport sold a total of 4.1 billion pounds of copper, so the African mine bumps the company’s total production by 6 percent.
Freeport also “expects the results of drilling activities will enable significant future expansion of initial production rates.”
Still, I think the main thing helping the stock is that at these prices, FCX looks dirt-cheap.
Fourth-quarter free cash flow turned negative for FCX. So, it delayed projects and slashed spending. It also raised $740 million in net proceeds from the sale of 26.8 million common shares. The company said it planned to use the proceeds for repayment of its revolving credit facilities, working capital and capital spending. The stock actually went up on the news because investors think FCX is now prepared to ride out a rough year.
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Let’s look at the chart action …
If you’re looking for a stock that should A) be able to ride out the rough times and B) be an early rebounder when things finally turn around, FCX is a good candidate.
These are rough and wild markets. The big trend for the major indices is down, but there are a few gems that should outperform and even prosper in the coming months. These three picks, plus the ones I talked about last week, should give you ample opportunity to make money even if you’re playing the long side in a bear market.
Yours for trading profits,
Sean
P.S. My blog is moving. If you want to stay up to date with my latest charts and news on natural resources, point your browser to:
http://blogs.globalwealthreport.com/red-hot-energy-and-gold/
And if you have not yet signed up for Global Wealth Report, click here.
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